We didn’t get a market structure markup Christmas miracle with that process pushed to the new year, but it was still an insanely busy week. The SEC was especially busy, providing a slew of materials on the same week it held a financial privacy-focused roundtable. There was also a bipartisan crypto tax proposal floated, and prediction markets had a wild week with Coinbase entering the judicial fray. Banking regulators at the FDCI and Fed also had quite a few legal developments which are covered below.
Here’s everything that happened last week in crypto law:
SEC Releases Slew of Guidance and RFI
The SEC was busy last week, updating their crypto F&Qs to include, among other things, acknowledgement that exchanges can permit non-fiat trades, meaning one can exchange ETH or BTC for stock which matches more crypto-native exchanges where native assets are exchanges without converting first to fiat. They also provided interpretative guidance that a broker-dealer can have “physical possession” of tokenized securities provided it follows best-practices on private key management, and Commissioner Peirce put out another batch of questions for input on regulatory changes needed to existing trading regimes.
Tl;dr– The custody and control of tokenized assets guidance is directly in line with what The Digital Chamber recommended in recent letters on the subject. Great to see industry input is being implemented! Also, the F&Q changes were interesting, because they demonstrate a shift to make traditional markets function more like crypto markets (modeled on existing tech) and not trying to make crypto-securities markets function like non-crypto securities markets (which were modeled on 1970’s tech). It seems like the agency is continuing to move forward, so looking forward to continuing to provide the resources needed to get crypto right at the agency level, full market structure legislation or not!
OTHER STORIES
SEC Privacy Roundtable: The SEC’s latest roundtable dealt with privacy topics, which I attended in person. Both Chair Atkins and Commissioner Peirce’s statements are worth reading and the second panel focused on policy issues is worth watching as well. We as Americans have give-a-mouse-a-cookie’ed our way into living in a warrantless surveillance state and it’s past time to take back the Fourth Amendment.
Crypto Tax Bill: There was a leaked copy of a bipartisan proposal to fix certain crypto-tax issues. It would remove the ability of users to take advantage of wash sale rules, which currently allow crypto users to sell their crypto for a loss and then immediately rebuy it to maintain position, but that was always going to go away and things like no gains on airdropped or mined tokens until sold are the bigger issue than wash sale accounting. After market structure, tax is the second most important legislative issue for crypto.
Coinbase Prediction Market Lawsuit: Coinbase has joined the fray of prediction market providers suing state regulators over claims that prediction markets are regulated under state gaming laws rather than CFTC exclusive jurisdiction over event contracts. Super interesting to see where these types of disputes end up.
AAVE/SEC Investigation Ends: AAVE has received confirmation from the SEC that the investigation the agency started into the peer-to-peer lending protocol has ended with no enforcement recommended. Huge dub. This comes, however, as AAVE is in a public dispute with a DAO member which has proposed suing the development company.
FDIC GENIUS Act Implementation: The FDCI has released its first official rulemaking proposal regarding GENIUS Act implementation. These implementing regs are going to start coming out of the prudential regulators at an insane pace so looking forward to working with them to get this massive stablecoin law properly implemented.
Stablecoin Adoption Continues: Speaking of GENIUS Act implementation, Paypal is juicing DeFi rewards for pyUSD again, and Visa settling payments in stablecoins starting with USDC on SOL while also offering a white glove stablecoin advisory service for banks. The digital dollar is here to stay.
DeFi Responds to Citadel: With all the developments last week, I overlooked covering the letter authored by the DeFi Education Fund and signed on by industry actors (including The Digital Chamber), which pushed back against Citadel’s claims and improper/misleading statements regarding what the industry has said regarding DeFi functionalities. Glad to help correct the record. Some TradFi groups were big mad at the response, though.
Debate Over Hyperliquid Liquidations: Another thing which happened last week and I forgot to include in my update was this fascinating debate over the propriety (or impropriety) of certain liquidations that occurred on DeFi perps platform Hyperliquid during the October 10th crash. I’m not going to pretend to have the technical chops to understand every aspect of the agreement or commit enough time to see who I side with, but I love in crypto these debates on deeply technical issues still largely occur on public forums. It makes everybody and the systems analyzed better, so I appreciate both Dan and Tarun contributing to the discourse.
Senator Warren Old Man Yells At Clouds: Senator Warren sent another letter filled with false statements and miscites on crypto, this time targeting DeFi platform pancake swap. The fact she still doesn’t understand the difference between privacy protocols and DeFi swaps is either willful ignorance or outright lying. It is insane that anybody still listens to her on crypto topics.
Custodia Master Account Fight: Custodia has asked for a rehearing en banc regarding their appeal of a prior master account denial. I am kind of surprised this fight is ongoing with the fed issuing narrow bank charters to other crypto companies recently, but worth covering until resolved.
Stablecoin Studies: A couple of great resources were recently released which provides actual facts to counter the fear-mongering around stablecoins paying yield leading to a deposit flight. The first was a Cornell study which is dense but that Paradigm did a good job of breaking down the key takeaways from. The other was from Austin Campbell which is a great read and one I highly recommend. But don’t let the truth get in the way of a good story, right?
Jito Moving Operations to U.S.: In things you LOVE to see, another major crypto company is on-shoring, this time in the form of SOL DeFi giant Jito. It wasn’t a meme. Some of the best technology companies of our time had essentially no option to be a U.S. company paying U.S. taxes and hiring U.S. employees, so it is amazing to see leaders in the space like Jito come back to the land of apple pie and freedom.
Federal Reserve Updates Guidance: The Federal Reserve has withdrawn prior guidance that required the financial institutions it oversees to obtain prior permission for “novel” activities which in any way involved crypto. The primary Fed Governor who was linked to Chokepoint 2.0, Michael Barr, dissented. Because of course he did.
People be Predicting Things: Anybody who knew what was going to be big in crypto are mostly retired on a beach somewhere, so always take these with a grain of salt (including the Top 10 Developments/predictions article I will almost certainly be putting out myself) but thought I would compile predictions here like this one of Bankless and this one from Messari.
Quantum Fight: If you were on Twitter this weekend, then it was impossible to miss the civil war among Bitcoin developers over how much of a threat quantum computing is to the network. One of those arguments where both sides are right in that the Bitcoin network will need an update to its encryption standard before quantum computing reaches a scale to break it, but we are at least 10 years from that so saying it’s a 5 alarm fire today is a bit panicky.
CryptoPunks Moma: I don’t care how dead NFTs are; when what is probably the most iconic and recognizable digital art collection of CryptoPunks gets added to the MoMa’s permanent collection, I add it to these updates. Long live the jpgs.
CFTC Chair Confirmed: The Senate confirmed a bunch of appointments last week including the new CFTC Chair Mike Selig and Travis Hill to lead the FDIC. Both will be busy with both agencies in charge of massive issues regarding modernizing rules to address digital assets.
Fed Floating Narrow Bank Proposal: The federal reserve opened comments on allowing “payment accounts” which is essentially a way for a narrow bank (like Custodia, as covered above) to operate within the federal reserve system without adding risk to that system. Not something I am seeing a lot of coverage on, but would be huge for both stablecoin issuers and the tokenized deposits ecosystem.
Lummis Not Seeking Reelection: One of the primary proponents of digital assets in the Senate, Senator Lummis, announced she will not seek reelection at the end of her term. Hard to blame her, with what a fight she has been making for common sense crypto regulation for years now facing a wall of opposition. But hoping she can finish off her term strong and make her dream of workable market structure legislation a reality!
Jump/Terra: The Terraform Labs bankruptcy administrator is suing Jump Trading alleging Jump’s actions were a primary reason for the Terra/Luna collapse. I still need to read the filing itself to see how much of this is smoke vs. fire, but still would be a huge development and any discovery in that litigation could give more details in who was behind the coordinated attack on the Terra/Luna ecosystem.
CONCLUSION
If you have any questions or would like me to write about anything else, let me know on Twitter (X?) or Farcaster. As always, I am an attorney, I am not your attorney. For legal advice, you should always consult (and pay for) an attorney.
Outro/Disclaimer: In late 2022, while I was at Polsinelli, I started preparing weekly updates for attorneys at the firm to stay abreast of the latest Web3 legal developments. I now post the weekly updates on my personal blog every Tuesday, where I also provide links to more obscure legal developments and otherwise discuss industry trends and stories. Please note, the views and opinions I express are solely my own. They do not reflect the official stance or endorsement of the Digital Chamber or any of its members.
The NFTtorney 